VZCZCXRO8450
RR RUEHDH RUEHDIR
DE RUEHDE #0489/01 3191414
ZNY CCCCC ZZH
R 151414Z NOV 09
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC 6715
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI 0009

C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000489 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN 
 
E.O. 12958: DECL:  11/15/2019 
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI SEEKS CASH AS COMMERCIAL DEBT LOOMS 
 
REF: A. A: DUBAI 392 
     ¶B. B: DUBAI 299 
     ¶C. C: DUBAI 457 
 
DUBAI 00000489  001.2 OF 003 
 
 
CLASSIFIED BY: Justin Siberell, Consul General. 
REASON: 1.4 (b), (d) 
¶1. (C) SUMMARY:  The surprise announcement by Dubai 
mega-developer Nakheel that it had paid USD 1.2 billion toward 
its securitized debt obligations one month ahead of schedule 
energized debt markets and coincided with the Government of 
Dubai's own announcement of a new USD 6.5 billion bond sale road 
show.  Although Nakheel and Dubai officials insist that the 
timing was merely coincidental, the two events, along with the 
government's recent payment of a matured USD 1 billion Dubai 
Civil Aviation Authority bond are clearly related and part of a 
Dubai strategy to attract new credit to finance old debt.  With 
oil prices strong and investors drawn to the promise of higher 
long-term yields in the GCC, the strategy appears to be working 
as Dubai recently sold USD 1.9 billion in Sukuk bonds from the 
latest offering.  Dubai may succeed in extending out payment 
schedules on its massive debt burden, but the prospects for it 
beginning to erase, as opposed to merely service, its debt 
remain uncertain.   END SUMMARY. 
 
 
 
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NAKHEEL DEBT PAYMENT ENERGIZES INVESTORS 
 
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¶2. (C) Nakheel, the mega-developer behind some of Dubai's most 
outrageous real estate development schemes (Palm Island, "The 
World") announced a USD 1.2 billion securitized debt payment on 
October 19, which temporarily energized investors as prices on 
Nakheel's upcoming USD 3.5 billion Sukuk bonds climbed to 106 
cents from 103.  Nakheel's debt payment appears to have been 
timed to coincide with the Government of Dubai's announcement of 
a new bond sale road show that aims to raise USD 6.5 billion. 
Shortly after the new bond sale announcement, the government 
completed the sale of USD 1.9 billion in five year Islamic Sukuk 
bonds, the biggest Sukuk sale from the Gulf region this year. 
According to media reports, Suresh Kumar, who participated in 
the bond sale meetings and who is Chief Executive of Investments 
at Dubai-based bank Emirates NBD, noted that "not all of the 
bonds are expected to be sold immediately, but rather over time 
as they are needed." 
 
 
 
¶3. (C) Dubai's new bond program attracted fairly strong demand 
from investors in a bond market eager to capture  attractive 
spreads on the sovereign issuance.  Although the government has 
not completed the entire bond sale, Essa Kazim, Executive 
Chairman of Dubai Financial Market, told Consul General and 
Econoff November 8 that the initial USD 1.9 billion bond sale 
tranche was oversubscribed, which would suggest that the 
government could easily raise funds from the yet unsold portion 
of the bond offering. Kazim speculated that investor interest 
was driven mainly by long-term bullish attitudes towards the GCC 
due to persistently high oil prices even as the global economy 
has remained in recession.  Investors, he said, anticipate a 
windfall for GCC states as increased demand for oil accompanies 
an eventual return to global economic growth. 
 
 
 
--------------------------------------------- ---- 
 
BOND SALE GOOD FOR NAKHEEL AND DUBAI PUBLIC DEBT? 
 
--------------------------------------------- ---- 
 
 
 
¶4. (C) It would seem the Government of Dubai plans to spend the 
cash generated from its bond sale program toward meeting its 
current public and private debts, which should be a good sign 
for Nahkheel.  At this stage, the total amount that the 
government may provide Nakheel is subject to speculation, 
especially since the developer continues to insist that it plans 
to resolve its debt burden on it own.  Nevertheless, Dubai may 
quietly replenish Nakheel's coffers in order for the company to 
make a public payment on its "own" (Ref A).  Dubai local media 
reported in May 2009 that the government provided Nakheel with 
at least one cash injection of an undisclosed amount from the 
USD 10 billion Dubai support fund last spring, which is also 
managed by the Dubai Department of Finance (Ref B).  Nakheel 
chairman Sultan bin Sulayim told Consul General November 5 that 
despite the company's difficulties, banks remained committed to 
 
DUBAI 00000489  002.2 OF 003 
 
 
Nakheel, and therefore willing to renegotiate debt terms due to 
Nakheel's attractive asset portfolio.  Of greater concern, 
according to Sulayim, was Nakheel's cash shortage which 
prohibited timely payments to contractors (Ref C). 
 
 
 
¶5. (C) Additionally, the fact that the government repaid a USD 1 
billion aviation bond on behalf of the Dubai Civil Aviation 
Authority on November 4 suggests that the proceeds from the 
recent USD 1.9 billion Sukuk bond sale are already being 
deployed to resolve current debt.  Kazim noted that the Dubai 
Department of Finance had obligated the USD 1.9 billion Sukuk 
bond sale proceeds to wind down public utility debts, 
specifically mentioning the Civil Aviation Authority bond as the 
government's top priority for the new cash.  He also noted that 
the additional proceeds expected from the remainder of the USD 
6.5 billion bond had not yet been obligated but that some of it 
was slated for Dubai's Road and Transport Authority (RTA), known 
to be grossly overdue in payments owed to contractors on the 
Dubai Metro and multiple road expansion projects (Ref A). 
 
 
 
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BONDS SOLD, BUT AT WHAT COST? 
 
----------------------------- 
 
 
 
¶6. (C) As the government uses new debt to service old debt, 
investors have rightly demanded increased premiums in order to 
mitigate the still looming, although less likely potential of a 
government default.  Standard & Poor estimates that Dubai and 
its government related entities will have to pay or refinance 
roughly USD 50 billion in debt over the next three years - "an 
amount close to 70 percent of the Emirate's gross domestic 
product."  Also according to media reports, economists estimate 
that Dubai will need to pay or refinance USD 10 billion by 2010, 
USD 12.1 billion in 2011, USD 15.2 billion in 2012 and USD 4.8 
billion in 2013.  Most market watchers believe that Dubai's 
total outstanding debt stands at more than USD 80 billion.  A 
private real estate developer close to the Dubai leadership told 
Consul General November 10 that the Government's strategy is to 
extend out the due dates on about half its reported $80 billion 
debt.  The leadership felt confident, he said, that it could 
"live comfortably" carrying a long-term deficit of around $40 
billion. 
 
 
 
¶7. (C) More risk tolerant investors have initially clamored to 
purchase the high-yield Dubai sovereign bonds as spreads have 
been priced just a level higher than junk bond status and mirror 
those offered by high risk Dubai private entities and other 
emerging market companies.  Meanwhile the rest of the market 
continues to rationalize the uncharacteristically high spreads 
for the sovereign bond issuance and rightly speculates about the 
negative implications that the high interest rates could have 
for Dubai Inc. private entities who attempt to offer bonds at 
reasonable rates in the future.  Local media, echoing DFM's 
Kazim, have noted interest in Dubai's bond sale is likely driven 
by the search among investors for greater returns than can 
currently be found in low-yield bond markets like the U.S. 
 
 
 
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COMMENT 
 
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¶8. (C) Nakheel's recent debt payment was intended as a sign that 
the ailing real estate developer still has life left in it, 
despite rampant speculation that the company was all but 
finished.  That early payment, in turn, laid the groundwork for 
Dubai's announcement of a new bond offering, which resulted in 
strong investor demand for new Dubai debt and subsequent 
proceeds from the sale of USD 1.9 billion in Sukuk bonds. 
Dubai's strategy appears to be to look to international capital 
markets to finance fiscal shortfalls and debt obligations rather 
than relying entirely upon Abu Dhabi to fill in the gaps.  Dubai 
is banking on investors discounting the obvious risks that come 
with purchasing Dubai bonds in favor of the higher potential 
yields for those bonds compared to the anemic returns to be 
 
DUBAI 00000489  003.2 OF 003 
 
 
found in the U.S. and other mature markets.  In the end, 
however, Dubai seeks to borrow now in order to pay back what it 
borrowed in the past, a formula that may catch up with it unless 
a dramatic (and currently unforeseen) turnaround occurs in the 
Dubai economy.  END COMMENT 
SIBERELL